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The inter-governmental conference convened to revise the Treaty of Rome, initiated at the end of 1990 and concluded at the Maastricht summit one year later, signalled the formal beginning of the process towards economic and monetary union (EMU). The Maastricht approach favoured gradualism over a rapid transition towards the adoption of a single currency. Gradualism was justified on the grounds that convergence of macroeconomic variables is a pre-condition of EMU and that time would be needed to set up new European monetary institutions. The events that occurred during the summer of 1992 have cast a shadow over the Maastricht approach. The Treaty was first rejected by the Danish voters, and later won a wafer-thin majority in France. Meanwhile, the uncertainty about the outcome of these votes, and the lack of progress of some countries in implementing their convergence programmes, combined with the uncompromising attitude of the German monetary authorities, put pressure on the European monetary system. After 13 years of steady progress during which the system had expanded from eight to eleven members, and almost six years since the last realignment, the exchange rate mechanism eventually broke up. In September 1992, the United Kingdom and Italy withdrew from the exchange rate mechanism and Spain and Ireland resorted, albeit temporarily, to exchange controls. [ABSTRACT FROM AUTHOR]

To travel hopefully is often better than to arrive. In Stage II we are travelling hopefully; this chapter is about what may happen if we arrive. Some of us hope that we will not make it - the authors seem to agree with those concerns. My fellow discussant, Giorgio Basevi, has added his concerns from one of the countries which in this chapter is classified as on the ‘periphery’; I might add that if a peripheral country in the authors' optimal currency area sense, such as Italy or Britain, were to be forced into the ‘core’, then these countries would risk becoming peripheral in the more usual sense of being retarded in growth. There are two main arguments advanced for EMU. The first promotes the gain in monetary policy credibility and so in price stability that could come from a single independent European central bank, able to avoid and prevent the time-inconsistency of national policy-making. The second states that the gains from reduced transactions costs and exchange rate uncertainty outweigh the losses from the lack of national exchange rate (and interest rate) adjustment to differential (or ‘asymmetric’) regional shocks. This last argument centres around the ‘optimal currency area’ debate and is the focus of this chapter. This investigates the extent to which the EC regions (countries) have differential shocks and adjust more slowly than US regions, which are taken to be the benchmark for a successful monetary union. [ABSTRACT FROM AUTHOR]

Introduction From all appearances the process of European monetary unification continues to gather momentum. Nearly four years have passed since the last significant realignment of exchange rates of members within the European monetary system (EMS). All significant controls on capital movements among member countries have been removed. Discussions of the establishment of a European central bank and a single currency are proceeding apace. If the current timetable is observed the transition will have been completed by the end of the decade. At the same time there remain serious questions about the advisability of a European Monetary Union (EMU) voiced, in the most recent round of discussions, by the governments of the United Kingdom and Spain. By definition, EMU involves a sacrifice of monetary autonomy. In response to country-specific shocks, governments will no longer have the option of adopting a monetary policy which differs from that of the union as a whole. Insofar as monetary policy is useful for facilitating adjustment to disturbances, adjustment problems may grow more persistent and difficult to resolve. These concerns are reinforced to the extent that it is believed that completion of the internal market will place new limits on the use of fiscal policy. Not only will individual governments have lost autonomy over the use of seigniorage to finance budget deficits but, insofar as the 1992 process renders factors of production increasingly mobile, constraints will be placed on their ability to impose tax rates significantly different from those of their neighbours. [ABSTRACT FROM AUTHOR]

Introduction and overview European economies are fast approaching complete integration, with elimination of legal restrictions to trade and factor mobility, increasing credibility of fixed exchange rates, and better coordination of economic policies. The legal and institutional process of economic integration among the ‘core’ countries of the European Community (EC) will be essentially complete by the end of 1992. As linguistic and cultural barriers to economic interaction weaken as well, Europe should soon become as much of a single economic entity as the United States of America. The question naturally arises of what difference this will make to overall economic performance on the one hand, and to regional developments on the other. If economic borders represented artificial restrictions in an otherwise undistorted economic system, their elimination would necessarily yield welfare improvements at the aggregate level. An integrated Europe should then enjoy increased production efficiency and faster capital accumulation. Baldwin (1989) and Rivera-Batiz and Romer (1991) studied the effects of economic integration in models of investment-driven economic growth. Increasing returns to scale are crucial to the mechanics of growth in models which account for use in production of non-accumulated factors (such as land and labour). Since constant returns to accumulation of knowledge and/or physical capital are necessary for investment to sustain steady growth, aggregate production must have increasing returns to scale as a function of accumulated and non-accumulated factors together. [ABSTRACT FROM AUTHOR]